Providing useful insights and making the complex world of energy more accessible, from an experienced industry professional. A service of GSW Strategy Group, LLC.

Friday, June 11, 2010

Emissions Twilight Zone

The defeat yesterday of a Senate resolution to rein in the application of the Clean Air Act to greenhouse gas emissions, together with the recent announcement by Senator Lindsey Graham that he would vote against the climate bill he helped Senators Kerry and Lieberman to draft, puts US efforts to deal with climate change into a sort of Twilight Zone, in which the widely-preferred approach of most of those wishing to tackle our emissions directly sits on the sidelines, while EPA regulations that were allegedly intended mainly to scare Congress into passing a climate bill this term now look nearly certain to take effect next year. No one on any side of the issue should rejoice at this outcome.

I confess that I haven't found the time to give the Kerry-Lieberman draft climate bill the same degree of scrutiny that I applied to the Waxman-Markey bill that the House of Representatives passed last summer. Based on the summary that I have read, K-L appears to address at least some of the serious flaws in Waxman-Markey, though the devil is often in the details of provisions such as restrictions on who would be allowed to trade emissions permits. In general, I'm pleased that more of the revenue from emissions permits would flow back to consumers and taxpayers under this bill than in the House version, and less would be diverted to favored constituencies or outright pork. That should reduce the net burden of emissions restrictions on the economy as a whole, a crucial concern when the recovery is still fragile. However, the inclusion of offshore drilling provisions that look to some like an endorsement of a practice that has become hugely controversial since the Gulf spill, but that from my reading could shut down most offshore drilling permanently--a conclusion Senator Graham now seems to share--has probably derailed the bill's chances for passage this year.

So without a legislated cap on emissions and a market-based mechanism to distribute the cuts to those parties with the greatest capacity to achieve them at the lowest cost--the essence of the "trade" portion of cap & trade--the EPA will now determine where and how emissions should be cut. That is the least-efficient way to go about this that I can imagine. It's even a mixed blessing that the EPA's "Tailoring Rule" would initially focus application of the Clean Air Act on new or expanding facilities adding large quantities of GHG emissions--one dimension of economic growth--rather than on all existing facilities, though the latter seems to be on tap for Step 3, due in 2013. As described, Step 3 would apply to any facility emitting more than 50,000 tons per year of CO2 equivalent GHGs. That's a lot more than your local pizza shop or most small businesses, but it's not quite as small as it's been portrayed. 50,000 tons is roughly the CO2 emissions from a business or facility consuming a mix of energy equal to two tanker trucks of gasoline or diesel fuel per day, or 9 Megawatts of average US grid electricity around the clock.

One of the ironies of the situation is that anyone now opposing legislation putting a price on carbon because they're not convinced of the risks of climate change is effectively supporting the EPA's approach to emissions. Perhaps that just means that they see the current Congress as a high-water mark of support for aggressive action on climate change and suppose that a future Congress--say, after November's mid-term elections--would be more willing to take the EPA out of the climate change business. Nevertheless, at least for now, the alternative to legislation like the Kerry-Graham bill is not inaction, but command-and-control regulations that could be much more damaging to a weak economy.